Zepeda Molina , CNH
Release Date: 0000-00-00
The National Hydrocarbons Commission (CNH) was created in 2008 as a part of the country’s Energy Reform. What were the specific reasons behind the creation of the CNH and why was it important at the time?The main reason for the creation of the CNH was to provide Mexico with an institution responsible for ensuring the efficient exploitation of the country’s oil fields, consistent with the best interests of Mexico and its people. Many wonder why such an entity is needed when there is a state own monopoly within the industry (Pemex). Pemex mandate is to create value. However it is very common around the world that oil companies, including state control companies, have a short-term view, whereas the country’s planning horizon is spread over the long-term. Hence, we are here at CNH making sure that this job is done well and that the planning and development of our fields are done with a long-term perspective and in the best interests of Mexico. That is the key point here and the key reason for our establishment.
What are the main responsibilities of the Commission that were granted to it by the Congress?
The CNH’s responsibilities can be summed up into four main categories: 1) technical regulation and enforcement in the upstream oil and gas industries; 2) the technical assessment of all exploration and production projects; 3) the determination of the country’s hydrocarbon reserves; and 4) the provision of advisory activities for the Ministry of Energy. Advisory services are mainly of technical nature and include providing technical analysis for the definition of the hydrocarbon policies in Mexico. As mentioned, our main objective is to ensure the most efficient exploitation of our fields particularly with a long-term perspective in mind. We then translate this mandate into the aforementioned responsibilities. As we have been discussing, the CNH is in charge of regulating and supervising the E&P activities in the Mexico. However, it has been a couple of years since PEMEX has really succeeded in its E&P strategy and today the company is trying to enhance its exploration and development projects by means of the new incentive-based contracts, with first bids coming out for the Santuario, Magallanes and Carrizo fields. In the short term we are also expecting to see exploration moves into deep waters.
Do you believe that PEMEX is ready to take on these initiatives? We have completed the Year Book Report on the country’s performance which is where you can find where we stand today in terms of E&P activities (available in www.cnh.gob.mx). The first part of the Year Book provides the diagnosis of the industry, and the main challenges for its long-term planning. The industry crisis that we are facing nowadays is a consequence of the short-term planning that has been in place for decades. Over the last 3 decades most of our production has been built from the super-giant field Cantarell and our giants fields (Ku, Maloob, Zaap, Abkatún, etc.), all of them discovered more than 30 years ago. Since these great discoveries, however, we did not invest enough in exploration. Even though investment in exploration has increased in the past few years, it is still way below required levels and insufficient to allow for major breakthroughs. Just as a reference, during the sixties Pemex drilled 3.3 times more exploration wells per year in average than Pemex did in 2010. The exploration activity in those days was phenomenal, the result: our main discoveries were the decade after.
In theory, the past five years have been a time of high investment in PEMEX E&P, but with minimal visible results. How do you explain this outcome?
Indeed, the Year Book validates the increasing investment in PEMEX’s E&P activities; unfortunately the investment in exploration has been still poor. This indicates a portfolio problem. I will come back to this question, but let me first explain the current situation with incentive contracts. We still have many resources in Mexico and the crises that we are facing now in terms of declining production has more to do with insufficient investment in exploration and enhanced oil recovery (EOR) projects than a scarcity of hydrocarbon resources. Considering that most of our fields are declining, we should have invested more to introduce new recovery techniques to our mature fields. By new recovery techniques I mean secondary recovery techniques and enhance oil recovery technologies. Deploying those secondary techniques while increasing exploration at the same time requires not only higher investment levels and a bigger budget but exponentially greater execution capabilities – you need hands to make it happen. No oil company in the world is capable of developing the resources that we have here in Mexico by itself. The full implementation of the new incentive-based contracts is crucial and central for the challenges that we are facing now.
Since we all agree that it’s important to ask for help and bring technology and expertise to Mexico, why does it take so long to issues contracts? We don’t see the implementation of the contracts moving faster. Why doesn’t PEMEX speed it up? Well, first of all let’s don’t forget that the regulation regarding the contracts was challenged at the Supreme Court until the end of last year. Therefore, there was no chance that Pemex could issue the contracts before the problem was solved.However, looking forward, Pemex has to build an efficient organizational framework for the implementation of the contracts. Normally in other countries when contracts like this are written, a special subsidiary is created in order to make sure its implementation moves as fast as the industry will allow. If the industry as a whole has an appetite to invest in those types of contracts, then you should develop the institutional capabilities to deliver them as soon as you can. The challenge here is the internal transformation of PEMEX to make quick decisions about those contracts. We should develop a special area of responsibilities within PEMEX in order to make the bidding round process more efficient. Secondly we need a structure to implement the contracts and later to supervise their compliance. PEMEX needs a complete task force within itself to supervise the cost recovery components of its contracts. This is the standard international scheme for contract implementation. So, in the next couple of years maximum we need to see a change within PEMEX in this direction.
PEMEX wants to start pushing into the Deep Water projects, but the Macondo catastrophe last year changed the industry and of course has forced everyone to look more carefully into safety regulations. Has the CNH developed some kind of program in order to ensure safe regulation of the upcoming deep water projects? Is PEMEX prepared to respond effectively to deepwater risks?In January of this year we issued a regulation for Deep Water projects and looked more carefully into the security issues associated with them. This is the first piece of regulation and additional documentation is on its way. This regulation is a consequence of our first review of the internal capabilities of PEMEX and whether PEMEX is ready to operate in the deep water. PEMEX has some experience in deep water operations having drilled 12 wells at average depths of 900 meters. Nevertheless, the challenge of ultra deep water that PEMEX is trying to engage is quite different. For instance, the Maximino project, on the US border, has depths of 10,000 feet which is a substantial jump from PEMEX’s experience to-date. Before proceeding we reviewed PEMEX’s internal procedures for ultra deep water and assessed that PEMEX is still in the process to develop all the necessary internal procedures to proceed. Chapter 7 of our regulatory review contains a long list of all the things that PEMEX should develop for their internal procedures. We are not inventing anything new, but rather we are following international standards. The regulation also includes the description and instructions for a transition phase in order to ensure smooth adaptation of internal procedures. The article calls for PEMEX to fully comply with all recommended regulations before beginning any drilling work for depths up to 1,500 meters. CNH is indeed concerned about security and safety standards. We are committed by law to ensure security in PEMEX’s operations which is precisely why we issued our regulation and mandated full compliance.
You mentioned the problem with the structure of PEMEX’s portfolio. Today out of 223 fields that there are in Mexico, 177 are in decline and 46 others are in development in the controversial Chicontepec zone that is said to be performing below expectations. Could you tell us more about the situation with the portfolio today and how you believe it can improve? According to information from PEMEX, around half of the prospective resources are onshore and in shallow waters. In terms of exploration, we should concentrate our efforts in shallow waters and onshore. In the short-term it makes more sense to develop fields onshore and in shallow waters because it is easier, cheaper and less risky than operations 1,500 meters below the sea level. Furthermore, we already have onshore and shallow water infrastructure in place so the production can come quicker. Deep water is something that should remain in our portfolio but should not be implemented as fast as shallow water and onshore considering all the potential that we still have there. As an example let’s look to the recent discoveries that Pemex did in shallow waters, the fields: Tsimin and Xux, both fields added more the 1,700 million barrels of equivalent oil reserves. This can give us an idea that probably there is still a lot of exploration work to do in shallow waters.In terms of development, considering the current situation that you just described of 80% of total fields being declining, the issue is on managing mature fields. Nevertheless, until now we do not see enhanced recovery projects taking place. We still have a lot of potential there and PEMEX should develop a national oil recovery enhancement plan and speed up and invest in those techniques. That is something that we have suggested, and we will keep pushing for it. Those are two main recommendations in terms of the portfolio management. Regarding Chicontepec, the CNH has openly announced the field’s problems since 2009 and called for a redefinition of its development plan. We believe that the whole strategy should be revamped. The main problem with Chicontepec is that PEMEX started the exploitation face of the zone without a proper understanding of the geology of the area and the technology that should be implemented in order to maximize the performance of the wells. The Commission has prepared different reports on Chicontepec (available in www.cnh.gob.mx) with one in particular showing that average productivity is continually declining. The report contains the technical review of the fields and concludes that the project generates negative cash flow before taxes, despite being in its exploitation phase. In the last two years, the project’s negative cash flow amounts to almost $3 billion dollars before taxes. Additionally, we don’t see that the project is creating value in the long-run since the amount of reserves in Chicontepec has been steadily declining in the last 6 years. By law our technical assessment is not binding, and we are still waiting for PEMEX to make the right decisions. The CNH is pushing for that to happen and we will not give up.
In a more personal level you were one of the public servants that started this Commission. What does that mean to you and where do you want to see the Commission going?
We still have a long way to go. We will keep on working on safety regulations. Safety is something that we are very committed to and we are working on establishing international standards in Mexico.But as a final remark, I see that my main contribution for this Commission should be to set up the basis for a truly autonomous institution. That’s written by law, however, regulating the state own monopoly is definitely not an easy task.
| Company: | CNH |
| Position: | President of the Commission |
| Country: | 墨西哥 |